by Nick Clark, National Manager General Policy
Business confidence recovering – but not for farmers
ANZ’s September Business Outlook Survey registered another lift in business confidence but it remains negative and it in fact deteriorated for farmers.
A net 36.7% of businesses expect general economic conditions to worsen over the coming year, an 11 point improvement compared to August. Agriculture was the most pessimistic sector with a net 76.5% expecting it to worsen, a 10 point drop in confidence.
Own activity is a better indicator of economic growth and it rose 2 points to a net 1.8% expecting activity to decrease. However, agriculture’s was down 8 points to a net 5.9% expecting own activity to increase. The gap between agricultural respondents’ expectations for the economy and their own activity is huge and it has widened further.
Profit expectations improved 11 points to a net 24.3% expecting profitability to worsen, but this is still pretty bad. Agriculture’s sentiment crashed by 36 points to a net 64.7% expecting lower profits. This made agriculture by far the most pessimistic sector and meant August’s recovery was very short lived.
Cost pressures remained acute with a net 89.8% of firms expecting costs to increase over the coming year (down 1 point). For agricultural respondents a net 88.2% expected higher costs, down from 95.2% August and 100.0% in July.
Pricing intentions remained high with a net 68.0% of firms expecting to increase their prices (down 2 points). Pricing intentions were lower for agricultural respondents (+52.9%) due to them mostly being ‘price takers’, and this was little changed from August.
Forward expectations for inflation eased a little from 6.13% to 5.98%. Agricultural respondents had the highest expected inflation of 7.17%, and it was up from 7.04% last month. This reflects big price increases flowing through on many farm inputs and higher inflation for farms versus the general economy. The Farm Expenses Price Index was up 13.4% for the year to June 2022, compared to a 7.3% increase for the Consumer Price Index.
Jobs up again
The number of filled jobs was up in August, according to Statistics NZ’s Monthly Employment Indicators, but they dropped for the primary industries.
In total there were a seasonally adjusted 2.32 million filled jobs in August 2022. This was up 10,300 (or 0.4%) compared to July 2022 and up 51,600 (or 2.3%) compared to August 2021.
For the primary industries there were a seasonally adjusted 106,300 filled jobs. This was down 1,100 (or 1.1%) compared to July 2022 and down 2,000 (or 1.9%) compared to August 2021.
In contrast to the primary industries’ decline in filled jobs there were strong annual increases for professional, scientific, and technical services (up 9,700); construction (up 7,900); manufacturing (up 4,500); retail trade (up 7,200); and public administration and safety (up 6,300).
Next week’s OCR preview
Next Wednesday the Reserve Bank reviews its monetary policy settings, including the Official Cash Rate. The markets are picking another 50 point hike to 3.50%, which is consistent with the Reserve Bank’s August Monetary Policy Statement’s forecast.
Since the Reserve Bank’s last review other central banks around the world have been as aggressive, if not more so. The Reserve Bank of Australia and the Bank of England’s most recent increases were 50 pointers, while the US Federal Reserve Bank and the European Central Bank each hiked theirs by 75 points. Sweden’s Riksbank went even further by increasing its rate a full percentage point.
The global economic impacts of China’s weakening economy and the war in Ukraine combined with the Federal Reserve’s monetary tightening has sparked a ‘flight to safety’. The surge of capital flowing to the United States is boosting the almighty US Dollar and putting huge pressure on other currencies, including big players like the Euro, the Yen, the Chinese Renminbi, and the UK Pound (the latter not helped by market reaction to its government’s mini-budget simultaneously slashing taxes and increasing spending). Weaker exchange rates are in turn is driving up imported inflation and pushing central banks to hike their policy rates further. The Bank of Japan has kept its policy rate rock bottom but intervened in the currency markets to prop up its sagging Yen.
New Zealand is not immune to the chaos. Our inflation is uncomfortably high at 7.3% and it seems worryingly broad-based. Hence our own OCR increases over the past year – to the tune of 275 points and plenty more to come. Despite these hikes the NZ Dollar has slumped by 18% against the US Dollar over the past year and by 8% against the Trade Weighted Index, a broad basket of currencies. This is adding to inflationary pressures.
The weaker exchange rate will be welcomed by exporters on the income side but it will also drive up the prices of imported fuel, fertiliser, and chemicals used by farmers and growers, and will cascade through to other prices too. As mentioned earlier the Farm Expenses Price Index has increased by almost twice the rate of the Consumer Price Index (13.4% versus 7.3%).
Inflation is unambiguously the enemy and rightly so. If it isn’t quickly beaten the peak of the OCR will have to be higher (closer to 5% than 4%) and it will need to stay higher for longer.
A 50 point OCR hike remains the likely outcome to next week’s review but if there is a risk it will be to the upside not the downside.
NIWA Soil Moisture Data
NIWA’s latest soil moisture maps (as at 9am Thursday 29 September) show soil conditions across most of the North Island about average for this time of year. Conditions are wetter than usual in Gisborne and Hawkes Bay. Soils are also about average in the South Island, although Kaikoura and the area around Alexandra remain wetter than usual, while there are some scattered drier than usual areas in Hurunui, around Wanaka, and inland eastern Otago.
Exchange Rates.
Despite a rally on Thursday, the NZ Dollar was still down 0.7% for the week against the Trade Weighted Index. It was also down against most of our key trading partners, the exceptions being against the Chinese Renminbi (stable) and the beleaguered UK Pound (up).
Source: Reserve Bank of NZ
Wholesale Interest Rates.
Over the course of the week, the yield for the 90 Day Bank Bill was up 8 points at 3.82% while the 10 year Government Bond yield was up 16 points to 4.18%.
The Reserve Bank will next review monetary policy settings (including the OCR) on 5 October. Expect it to be hiked at the very least by 50 points to 3.50%.
| This Week (29/9/22) | Last Week (22/9/22) | Last Month (29/8/22) | Last Year (29/9/21) | |
| OCR | 3.00% | 3.00% | 3.00% | 0.25% |
| 90 Day Bank Bill | 3.82% | 3.74% | 3.46% | 0.65% |
| 10 Year Government Bond | 4.18% | 4.02% | 3.89% | 1.96% |
Source: Reserve Bank of NZ
